Chapter 1 Welfare economics and the environment

This chapter describes environmental economics as seen from the standpoint of neoclassical welfare economics. It discusses theoretical framework for measurements of welfare effects of changes in the environment. This framework is founded on a general equilibrium approach, to environmental problems. The chapter thus gives a conceptual theoretical framework for environmental economics. This framework has been presented in mathematical form. The chapter discusses the concept of Lindahl equilibrium. It is the most natural correspondence in an economy with public goods to the competitive equilibrium in an economy without public goods. The traditional general equilibrium models discuss the case where all goods in the model are privately owned and sold and bought on perfect markets. The chapter reviews that equilibrium in such an economy has some very desirable properties, the most important being that it is Pareto efficient, that is, there are no other feasible allocations in the economy that are more desired by some individuals but not less desired by all others. Finally, three approaches are discussed in the chapter: (1) to ask people about their willingness to pay for environmental services, (2) to make assumptions on preferences that will enable one to derive the utility function over environmental services from the demand functions for private goods, and (3) to make assumptions that imply that the value of some environmental services is capitalized in the price of some private goods.